Momentum is the phenomenon that was empirically proved to exist in price movements. Momentum explains that stocks that have been recently performing well (winners) will continue to outperform and the stock that has been underperforming (losers) will continue to underperform. Trading momentum represents a strategy in which a trader tries to profit on the existing price trend thus buying winners and selling losers.
In technical analysis, the momentum indicator is simply calculated by taking the difference between today’s closing price and any price from the past n days. Thus, it measures the speed of price change. Traders mostly use prices of 10 previous days for calculating momentum. Values higher than zero indicate the price is increasing and the values below the zero that price is falling. This indicator does not contain limits thus, determining overbought and oversold areas is subjective.
Empirically, momentum proved to persist longer in an uptrend than in falling trend.
